A boost to revenue and earnings from FY19e onwards.

As the PR-B contract commences on 1 July 2018, a full year of revenue will be recognised in FY19e. We estimate $22.9mn incremental revenue in FY19e from the contract and $26.9mn annually thereafter.

The difference in annual revenue is due to the progressive transition of the existing Pasir Ris-Tampines and Bedok contracts after June 2018 and October 2018, respectively. We have revised our FY19e revenue and PATMI estimates upwards by 14.1% and 5.9%, respectively.

Ability to pay higher dividends further out in the future.

We think it is likely for expenses to be higher during the ramp-up phase due to the learning curve on operational issues in the new sector. After stabilisation, we believe earnings and cash flows to be improved and we think that higher dividends is likely.

The Negatives

Tendered the lowest bid, likely trading-off margins.

The ongoing AMK-TPY contract was awarded at $160.6mn for a tenure of seven years and nine months. This new PR-B contract is worth only 20% more, despite being for a comparable tenure and yet approximately double the number of households.

We assume $30mn capex for vehicles, bins and containers. We also assume the capex to be funded by a 20/80 mix of equity/debt. Also expect higher depreciation expense going forward due to higher PPE.

Outlook

The outlook is positive.

Some weakness in the near-term is to be expected as recent initiatives (waste to energy plant, sludge treatment facility and public waste collection contract) normalise or ramp-up utilisation, but earnings and cash flow is expected to be higher after the respective learning curves have been overcome.

Our rating downgrade is due to the combined effect of the 6.4% favourable price movement since our last report, and the new lower target price. We have revised our estimates to include the PR-B contract.

Our target price is lower than previous due to our change of assumption that the ongoing AMK-TPY contract is not renewed when it concludes in September 2021.

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